You may ask, what is retirement? In simple terms, it is leaving work or ceasing to work at a particular age. Different countries have different policies on retirement age. Some retire at the age of 65 and others slightly higher or lower than that. When you are almost retiring, you should start planning or saving for your life post- retirement life to avoid mishaps that may occur due to inadequate preparation. There are however common retirement mistakes that may seem far removed from our daily concerns and yet their effects last long after we retire.
Here are some of the common mistakes that people make in their retirement planning:
Underestimating the cost and length of retirement
Saving for retirement is very important. The money that you keep away is more important as it will ensure that you don’t run out of money after retiring. Save as much as you can to be on the safe side. If you don’t invest enough from what you receive from the company in your working years, it means you are leaving a lot of money on the table. Some of the main factors to take into account while estimating what the cost of your needs will be once you retire include:
Healthcare: Even when you have Medicare, you should have a back-up for supplemental insurance. For instance; prescription drugs and nursing home care service should be on your top list of priorities, insured or not.
Longevity: Many advisers urge clients to have enough savings to last them as long as 25-30 years after retirement. This is because you could spend a quarter century or more on retirement and you do not want to live that long broke while you could have helped it.
Lifestyle sticker shock: Retiring people may need at least 80% of their pre-retirement income to avoid an unnecessary shock of lifestyle change upon retirement.
Inflation and taxes: The cost of living has increased more over the past 25 years due to inflation. The taxes have increased now more than before and therefore, you should also consider what taxes you will be paying on the money withdrawn from your retirement account. The more the price of the products increase, the higher the taxes charged.
Getting out of the market after a downturn
You may be tempted to pull out all the stocks in your retirement portfolio when market takes a big hit. If you do this, however, you may miss the gains of the market should things turn around. You want to keep a good mix of asset classes in your portfolio? The answer is stock, bonds, and cash and rebalancing at least once a year to keep your asset allocation on track.
Taking emergency money from retirement account
In some cases one might need money for an emergency. In such situations the company allows you to borrow from your account. Borrowing can be an expensive choice, however, since it has consequences when you delay the repayment. You may be charged a penalty of 10% or more depending on the company policy. These are the consequences of late payment:
- The repayment requirements: You will have to repay the money quickly if you lose your job or take another one. It is usually a requirement to pay within 30 to 60 days. If you cannot, the IRS considers the money you have taken out to be a withdrawal, which means you will have to pay taxes if you are under age 59, which is a penalty as well.
- Smaller retirement savings: Your benefits of investments growth may be lost if you take out the loan. And that means a smaller retirement saving for you.
It could also depend on a number of factors including; the repayment period, whether you continue contributions during this period, the size of the loans, the earnings on your account and the loan interest rate. You won’t receive any payment from any employer matching contributions if you stop contributing while you are paying back your account and the loan interest rate.
Identifying the wrong place to live.
Many people tend to move to remote areas to reduce the high cost of housing and living expenses in the city. Upon moving, however, they feel lonely and this leads to frequent traveling to visit their loved ones. If this was not adequately planned for prior to retirement, the savings might end up being insufficient. This can lead to the retired person feeling frustrated. Remember to strike an effective balance between to live when you retire and how you will contact your people.
Retirement ought to be a time to sit back and relax from the hardships of the working life. Protect yourself from retirement blues by planning well in advance for it. being prepared for retirement is always a step ahead when the time comes to put your pens down.